The Economic History of the World - John M Parmanjmparman.people.wm.edu/341-lecture-slides/01-26-12.pdf · The Economic History of the World ... Y L = g A + ag K L + cg Z L a, b

The Economic History of the World

J. Parman (College of William & Mary) American Economic History, Spring 2012 January 26, 2012 1 / 35

The Malthusian Trap

The Malthusian Trap is a situation in which aneconomy is stuck at a particular income per person.The basic logic is the following:

Suppose there is a rise in income per person (maybebecause technology improved)Higher income levels lead to more births and fewerdeathsPopulation growsOutput grows but output per worker falls until incomeper person is back at its original level

The problem is that limited resources mean outputcan’t grow as fast as population


America as the Exception to the Rule

35000300000

population

15000

20000

25000

30000

100000

150000

200000

250000

capita (1996 dollars)

lation (thousands)

population

GDP per capita

0

5000

10000

0

50000

100000

1650 1700 1750 1800 1850 1900 1950 2000

GDP per

Popul



12

13

7

8

9

10

11

12

ln(population)

ln(GDP per capita)

4

5

6

7

1650 1700 1750 1800 1850 1900 1950 2000



The United States has a unique history amongdeveloped economies

When America was colonized, the rest of the world wasvery much stuck in a Malthusian trap

However, the colonies managed to experience rapidpopulation growth without declining output per person

One reason was America’s unique abundance of naturalresources


Growth During the Colonial Period

The colonial period had high population growth rates:population was growing at about 3.5% per year

The size of the economy was growing substantially:total output increased by a factor of 10 between 1710and 1775

Per capita income grew but it grew slowly: output perperson increased by roughly one third between 1710 and1775

The colonies weren’t in a Malthusian trap but theyweren’t experiencing modern growth either


Other Ways to Grow

Obviously any economy ultimately runs into naturalresource constraints

Are there other ways to sustain growth in income perperson?

There are really only two ways to do it:

Use more inputs per person (for example, build moremachines)Use inputs more efficiently (better technology, betterallocation of resources, etc.)


Growth From Independence to 1840

Little data leads to lots of stories

Standard growth accounting data does not exist

Paul David proposed a clever solution that doesn’trequire knowing total GDP:

Total output per capita must equal average output perworker times the fraction of the population in theworkforceAverage output per worker is the weighted average ofoutput per worker in agriculture and output per workerin other sectorsDavid assumes productivity in manufacturing relative toproductivity in agriculture was constant (strongassumption)



David’s approach gives us a different way of breakingdown the sources of growth in output per capita thatdoesn’t require measuring GDP and the capital stock

Output per capita can grow because of any or all of thefollowing (somewhat observable) factors:

A shift of workers from agriculture to other sectors(productivity was higher in other sectors)An increase in agricultural productivity (which byassumption implies an increase in productivity in othersectors)An increase in the labor force participation rate



DecadeShift out of Agriculture

Change in Agricultural Productivity

Labor Force Participation

Rate Total1800-09 -0.009 -0.032 0.003 -0.0381810-19 0.039 0.035 0.019 0.0951820-29 0.066 0.178 -0.012 0.2401830-39 0.055 0.110 0.025 0.2001840-49 0.061 0.000 0.066 0.1311850-59 0.011 0.215 0.000 0.228

Sources of Change in Per Capita Output, 1800-1860Percentage Change Attributable To:


Growth from Independence to 1840

A few reasons to be skeptical:

David’s growth in agricultural productivity numbersseem big for a period with little technological advance

Many of David’s non-agricultural laborers may haveactually been in agriculture

Manufacturing productivity was likely growingdifferently than agricultural productivity


Growth After 1840

We know much more about growth after 1840 becausethe data gets much better

Better data allows us to get good measures of outputand to break down growth into growth in labor, capital,land and productivity

The main factors in economic growth since 1840 turnout to be quite different than the main factors before1840


Growth After 1840

With good data on output, labor and capital we can dostandard growth accounting

This means calculating the contributions of growth intechnology (A), labor (L), capital (K ) and naturalresources (Z )

For growth in total output:

gY = gA + agK + bgL + cgZ

For growth in output per worker:

gYL

= gA + agKL

+ cg ZL

a, b and c represent the share of income that goes toeach particular input (if we use a lot of one input,growth in that input will have a big effect on growth inoutput)


Growth After 1840

Period Labor Capital Land Output1840-1860 3.42% 6.57% 3.73% 4.75%1870-1930 2.24 4.35 2.55 3.751940-1990 1.59 3.14 0.34 3.22

Period Labor Capital Land Output1840-1860 49% 26% 10% 15%1870-1930 43 27 4 271940-1990 41 14 0 45

Growth Accounting, 1840-1990Annual Rate of Growth of:

Growth Accounting, 1840-1990Percentage of Output Growth Attributable to:


Growth After 1840Period Labor Capital Land Output1840-1860 3.42% 6.57% 3.73% 4.75%1870-1930 2.24 4.35 2.55 3.751940-1990 1.59 3.14 0.34 3.22

Period Labor Capital Land Productivity1840-1860 49% 26% 10% 15%1870-1930 43 27 4 271940-1990 41 14 0 45

Growth Accounting, 1840-1990Annual Rate of Growth of:

Growth Accounting, 1840-1990Percentage of Output Growth Attributable to:


Summarizing American Growth

Population growth has consistently been a big part ofoverall growth in output

Growth in land remained relevant throughout the 1800s(until the frontier closed)

Growth in capital has declined in importance (althoughgrowth in capital per worker remains important togrowth in output per worker)

Growth in productivity has really emerged as the biggestfactor in explaining growth in output and output perworker

To put things simply, early American growth was allabout extensive growth (expanding land and laborsupply), modern growth is all about improvingproductivity


Putting American Economic Growth in Perspective

Rank Country

GDP per capita (2010 US

dollars)

180 Democratic Republic of Congo 171

179 Liberia 239

178 Sierra Leone 311

145 Kenya 912

United States, 1710 952

144 Nicaragua 972

118 Indonesia 2,329

United States, 1840 2,336

117 Paraguay 2,337

84 Namibia 4,543


83 Azerbaijan 4,807

52 St. Kitts and Nevis 10,315


51 Lithuania 11,172

37 Oman 18,013


36 Czech Republic 18,557

10 Austria 45,989

9 United States 46,381

8 United Arab Emirates 46,857

7 Netherlands 48,223

6 Ireland 51,356

5 Denmark 56,115

4 Switzerland 67,560

3 Qatar 68,872

2 Norway 79,085

1 Luxembourg 104,512

International Monetary Fund, World Economic Outlook Database, April 2010


Growth of the Colonial Economy - GDP

350000

400000

150000

200000

250000

300000

350000

usan

d 18

40 dollars

0

50000

100000

1650 1720 1774 1781 1793 1800

Thou


Growth of the Colonial Economy - Population

2500000

1000000

1500000

2000000White

Black

0

500000


Growth of the Colonial Economy - GDP per capita

70

30

40

50

60

840 do

llars

0

10

20

1650 1720 1774 1781 1793 1800

18


Why Settle America?

Early exploration of the Americas had a lot to do withmercantilism

An oversimplification: countries assumed greatermilitary and political power came from greater stocks ofgold and silver

The Spanish had success in finding places with gold andsilver that could be mined

Other countries had to rely on trade to build up stocksof silver and gold

This led countries to seek out colonies that haddifferent resources from the mother country and to setup extractive institutions


Mercantilism and Role of Colonies

Philipp Wilhelm von Hornick, Austria Over All, If She OnlyWill, 1684 (quoted in Robert Ekelund Jr. and RobertHebert, A History of Economic Theory and Method,Waveland Press, 1997):

That every inch of a country’s soil be utilized foragriculture, mining or manufacturing

That all raw materials found in a country be used indomestic manufacture, since finished goods have ahigher value than raw materials

That a large, working population be encouraged

That all export of gold and silver be prohibited and alldomestic money be kept in circulation

That all imports of foreign goods be discouraged asmuch as possible


Mercantilism and Role of Colonies

Philipp Wilhelm von Hornick, Austria Over All, If She OnlyWill, 1684 (quoted in Robert Ekelund Jr. and RobertHebert, A History of Economic Theory and Method,Waveland Press, 1997):

That where certain imports are indispensible they beobtained at first hand, in exchange for other domesticgoods instead of gold and silver

That as much as possible, imports be confined to rawmaterials that can be finished [in the home country]

That opportunities be constantly sought for selling acountry’s surplus manufactures to foreigners, so far asnecessary, for gold and silver

That no importation be allowed if such goods aresufficiently and suitably supplied at home


Why Settle America if You’re British?

The colonies in the mid-Atlantic didn’t yield gold orsilver

Initially, British businessmen thought the southerncolonies might be good for silk and winemaking

That didn’t really pan out, but tobacco did

The northern colonies were about subsistenceagriculture and port services






Mercantilist Policy and the Colonial Economy

Although the colonies didn’t have gold and silver, thecolonial economy was very much shaped by mercantilistpolicy

Colonies were supposed to provide England withcommodities unavailable in England and to serve as acaptive market for English finished products

Colonies weren’t supposed to compete with the mothercountry: you sell your resources to England, not toother countries, and you buy your finished goods fromEngland, not from other countries


Mercantilist Policy and the Colonial Economy

These mercantilist policies had very different effects onthe southern and northern colonies

Southern colonies had land that could be used fortobacco

Britain provided a growing market for tobacco, supplyof tobacco rose dramatically during the entire colonialperiod

Northern farmland wasn’t all that good so as populationgrew, the marginal product of labor dropped

Mercantilist policy didn’t leave many manufacturingjobs for these farmers to switch to

The one big industry the north did have was shipping(they had timber and lots of things needed to beshipped)


The Colonial Economy

Colonial Workforce by Sector

ShippingOther

Colonial Workforce by Sector

Agriculture


The Colonial Economy

So the colonial economy was dominated by agriculture

The good news: there was plenty of land to farm

The bad news: to farm all that new land, the coloniesneeded more people

More good news: wages were good in the coloniesrelative to Britain so people wanted to work in thecolonies

More bad news: travel from England to the colonieswas extremely costly (almost equal to a Germanmigrant’s annual salary)

Solution: indentured servitude


Credit Constraints and Indentured Servitude

The cost of passage to America was £5 to £10, anamount greater than average annual income at the time

To put that in perspective, think about college tuition:

Average tuition and fees at private four-year colleges is$26,273Average income for a 18 to 24 years old high schoolgraduate is $26,218 for men, $22,814 for womenIf there were no student loans, how would people payfor college?


How Indentured Servitude Works - Standard

Laborer and shipper strike a contract trading a period of labor for passagep p g

Shipper transports laborer to Americapp p

Shipper sells the contract to employer inShipper sells the contract to employer in America

After contract is up, servant becomes a free laborer


How Indentured Servitude Works - Redemptioners

Laborer borrows money from the shipper to pay for passage and suppliesp y p g pp

Shipper transports laborer to the coloniespp p

Laborer finds an employer and negotiates aLaborer finds an employer and negotiates a contract long enough to pay back shipper

After contract is up, servant becomes a free laborer


How Indentured Servitude Works


How Indentured Servitude Works

This indentured...between [Alexander Beard]...of the onepart, and [John Dickey]...of the other part, witnesseth, thatthe said [Alexander Beard] doth hereby covenant, promiseand grant, to ...[John Dickey]...and his assigns, from the dayof the date hereof until the first and next arrival at[Philadelphia] in America...and during the term of [three]years to serve in such service and employment as the said[John Dickey] or [his] assigns shall there employ [him]...Inconsideration whereof the said [John Dickey] doth grant...topay for [his] passage, and to find allow [him] meat, drink,apparel and lodging, with other necessaries, during the saidterm; and at the end of the said term to pay unto him theusual allowance, according to the custom of the country inthe like kind...


Documents

The Economic History of the World - John M Parmanjmparman.people.wm.edu/341-lecture-slides/01-26-12.pdf · The Economic History of the World ... Y L = g A + ag K L + cg Z L a, b